1. 1 September 2014 Bender Trust Research Project Overview Greg Francfort

2. The Bender Trust  Started by alumni David Bender  $120,000 principal in 1980  Currently worth $2,500,000  Used to fund scholarships  LIBOR is my research department 2

3. Greg Francfort  Rutgers undergraduate in engineering  Wharton MBA  LIBOR co-founder in 1994  First Boston Corp.  Sell-side analyst, Assoc. Research Director  Neuberger Berman  Portfolio Manager, Research Director  Securities Analysis at Columbia University 3

4. Why start LIBOR?  Jobs, jobs, jobs  Wall Street to Old Queens 38 miles  Where are the Rutgers Alum?

5. Why do Bender Research Project?  Learn about yourself  Lockheed at $2  10-Ks at mid-night  Prep for Interviews  Prep for Retirement

6. 6 Part I: Fundamentals

7. Investing in a Business  Offer to let RU students invest in restaurant start-up  Raising $1,000 from each of 25 students  Will fully distribute annual profits  Is this an attractive opportunity?  Forecast the annual profits  Value the profits 7

8. Balance Sheet  Assets = $100,000  Food prep equipment  Inventory and receivables  Liabilities = $50,000 in debt  Equity = $50,000  $25,000 from GF  $25,000 from students 8

9. Projected earnings  Revenue = f (?)  Expenses = f (?) 9

10. Revenue forecast ?? 10

11. Revenue forecast  Open 24 weeks/yr; 8 hours/day  Serve 8 meals/hour = 10,800/year  Average ticket $7.00  Revenue = $75,000 11

12. Expenses forecast ?? 12

13. Expenses forecast  Labor: 24wks X 7d X 8hrs X $12 X 1.5  = $24,000  Food = 40% of revenue = $30,000  Rent and Utilities = $10,000  Interest = $50,000 X 6% = $3,000  Net profit = $8,000 X.6 = $4,800/yr 13

14. Valuation  Equity raised = $50,000  Net profit = $4,800  P/E = 10.4X  Earnings yield = 9.6% 14

15. 15 Summary “There is no such thing as present tense in performance management.” Too often investors buy stories without calculating valuation and chase performance 1980-2005 S&P 500 12.5% Average mutual fund 10% Mutual fund investor 7.3%

16. 16 Starbucks (SBUX) $75.47  52 week range: 67.93 – 82.50  S&P 500: 1,986 2013A2014E2015E EPS$2.26$2.68$3.16 P/E33.428.523.7 S&P EPS$110$122$130 S&P P/E18.016.215.3 Relative P/E186%176%155%

17. 17 Wells Fargo (WFC) $51.70  52 week range: 40.07 – 53.08  S&P 500: 1,986 2013A2014E2015E EPS$3.89$4.12$4.28 P/E13.312.5 12.1 S&P EPS$110$122$130 S&P P/E18.016.215.3 Relative P/E 74% 77% 79%

18. 18 Company Description  One paragraph  What does the company do to make money?  What products / services do they sell?  What are the costs of production?

19. 19 Competitive Analysis  One page: Porters Five Forces  Identify customers / suppliers  What are the competitive advantages / disadvantages? Size, market share?  Is the business getting more or less competitive?  Is there a moat around the company?  Be succinct!

20. 20 Part II: Forecast and Valuation

21. Preeminence of future EPS A robust forecast of EPS is the essence of Security Analysis 21

22. 22 Earnings Outlook  What are the prospects the company can grow it’s business?  Growth from price or volume increases?  What is the danger of cost increases?  Likelihood of positive or negative earnings surprise compared to consensus estimate of EPS for 2014?

23. 23  Build a Model?  Revenue minus expenses = profits  Profits / shares outstanding = EPS Earnings Outlook

24. Forecast Revenue  Use 2013 as a base to forecast 2014 revenue  Project 2014 growth for the industry  What factors will drive growth?  Try to use units or volume  How might your company’s market share change?  Price change in 2014 vs. 2013? 24

25. Forecast 2014 Revenue  Use 2013 as a base  Use 2013 growth as the starting point for the 2014 growth rate  Eg. HD 2013 $79,023mm vs 74,754  G = 5.7%  2014 Rev forecast $83,527mm 25

26. 2014 Revenue  Identify factors driving revenue acceleration or slowdown  Understand drivers to 2013 growth  Use “Unit Economics” if possible  Start with Industry if possible 26

27. Industry Growth for HD  ????  Use your creative intellect 27

28. Industry growth for HD  Housing construction/storm activity  Remodel trigger: sales of existing houses  Building products inflation  Product cycles: Nest, marble, appliances  U.s. GDP and Consumer spending  Consumer spending on residential investment 28

29. 2014 Market share  Number of stores  Traffic  Sales per store  Price  New product categories  Advertising/promotion 29

30. Market share  Competitor actions (Sears) to expand or cede share  Lowes’ actions  New entrants  Acquisitions/divestitures  New geographies (Mexico) 30

31. Unit Economics  Sales per store X store count  Sales per square foot X sq ft  Number of customer transactions  Average ticket 31

32. Other factors  53 weeks in a year  Calendar shift shortens holiday season  The internet 32

33. 33 Case Study: BUD

34. 34 U.S. Beer Industry Unit Demand  Population  Beer consumer specific population  Weather  Income  Gasoline prices, employment rate  Consumer taste  Health issues  Mad cow for beer?  Low carb/healthier diets  Social trends  Price of beer  Price of substitutes  Advertising by suppliers of beer  Advertising by suppliers of substitutes  Legal issues  Stricter penalties for DWI  Changes in legal drinking age  New Products or Market segments

35. Profit = revenue - expenses  HD COGS = 65.3% of Revenue  S,G&A = 23.1%  Operating profit = 11.6%  Interest Expense 35

36. 36 Expenses  COGS  Variable costs:  Fixed costs: depreciation  S,G&A  Own or lease stores?  Interest expense  Income taxes

37. EPS  Net Income/ fully diluted shares outstanding  HD consensus is $4.50 per share  Are you above or below? 37

38. 38 Valuing the Earnings  Calculate P/E on your 2014 EPS forecast  Relative P/E to:  S&P500 at 1986; S&P500 EPS 2014 est $122  S&P500 P/E on 2014 = 16.3x  Does our Company deserve a premium or a discount?  Depends on growth and on risk

39. Other Valuation Tools  DCF  P/Book Value per Share  P/Asset value  EV/EBITDA 39

40. 40 Recommendation  Convincing case of earnings surprise (positive or negative)  Persuasively assert the stock deserves a larger / smaller relative P/E multiple on 2014 EPS than present level  Possible takeover potential or some other corporate event that unlocks or reduces value

41. 41 Summary  Maximum three pages  Five minute presentation  Only the important information  More effort = more knowledge  “If I had more time I could have written a shorter report”

42. 42 Resources  Yahoo! Finance  EDGAR  10-K, 10-Q, etc.  Company websites  Customers, employees, competitors, suppliers  Creative intellect!

43. 43 Possible Stock List Marlin Business Svcs. Corp.MRLNTraveler’s InsuranceTRV Oracle Corp.ORCLFedexFDX AppleAAPLBP Wal-Mart Stores Inc.WMTBlackstone Mortgage TrustBXMT Lowe's Companies Inc.LOWViacom, Inc.VIA-B The Home Depot, IncHDValero Energy Corp.VLO Comcast Corp.CMCSABoeing Co.BA CarMax Inc.KMXWCI CommunitiesWCIC Cabot Oil & GasCOGIntelINTC Packaging Corp. of America AT&T Pandora Media Microsoft PKG T P MSFT Cedar Fair LP Ubiquiti Networks ASML Sandisk FUN UBNT ASML SNDK

44. 44 Timeline  Form groups: NOW  Chose stock to analyze: SOON  Report and Presentation: October 2014  In time for internship interviews

45. 45 Questions?  gfrancfort@nb.com  rulibor@gmail.com